Commentary on Australian and world events from a socialist and democratic viewpoint

Renationalise energy

Looking at the Turnbull government’s move to limit gas exports, I can’t do better than quote Bernard Keane in Crikey (paywalled, but here’s the bit that matters)

A while back I suggested Turnbull had been “mugged by reality” on energy policy. But he’s far from the only one. All of us who have advocated free markets and the primacy of the private sector in delivering essential services have copped the same mugging; now we need to accept that liberalisation has dramatically failed in energy. A mystifyingly complex market was designed for private sector operators with the intent of freeing up government capital and driving greater efficiency. And while the Coalition’s climate denialism created investor uncertainty that proved a key factor in the crisis, it’s the relentless opportunism of industry players to game the system and exploit every opportunity to jack up prices, and Santos’ truly spectacular bungling, that has led to this. As you sow, so shall you reap. Back to hardline regulation.

I was in the minority in a recent economists poll on this topic, supporting gas reservation, though not with any great enthusiasm. My statement

Energy policy in Australia is a mess. Prices don’t reflect economic or climatic costs. Availability of some low-cost gas would obviously improve the situation here, in particular allowing an adjustment away from coal. I don’t know whether the opportunity cost of forgoing overseas sales is accurately reflected by the export price.

The policy announced by the Turnbull government amounts to a partial nationalisation, since the government has taken control of our gas reserves back from the supposed private owners. But it’s a half-baked and half-hearted step. What we need is properly national, publicly owned energy grid, in which the role of private ownership is to fill gaps left by the public.

14 thoughts on “Renationalise energy”

This has nothing directly to do with energy markets, or neo-liberalism, or the vacant space masquerading as a slow rolling train wreck that is our government, but I just wanted to share this with John and his readers (apologies if you’ve seen it before):

A week before the US election David Sedaris wrote about undecided American voters, and he compared them to passengers on a plane being presented with their meal options: “‘Can I interest you in the chicken?’ [the flight attendant] asks. ‘Or would you prefer the platter of s**t with bits of broken glass in it’ To be undecided in this election is to pause for a moment and then ask how the chicken is cooked.”

What’s even better is that if only 25 passengers out of 100 choose the platter option, we all get to eat it! Even those of us who are not on the plane …

The Australian energy market is not an energy market. It is a capital market. We have a system where we maximize money output for minimum money input. What we want are markets where we maximize energy output for minimum money input. We can do this by getting rid of the concept of the time value of money by making money tokens zero value. Markets in goods and services are fine it is using money markets to decide on investments that gives these perverse outcomes.

To show how money markets give bad results just take a look at the Energy Commission report on using Tasmanian dams as energy storage. The Energy Commission says that batteries are more economically efficient than using the Tasmanian dams. The cost of putting another link across bass strait makes energy storage available at a cost of 7cents per kilowatt hour. This compares to a cost of $200 per kilowatt hour of battery storage. It is cheaper to use existing Tasmanian dams than it is to use battery storage for energy storage.

Regarding JQ’s “partial nationalisation” of gas, Energy Minister Frydenberg was pressed by Sabre Lane on ABC radio this morning to re-confirm Turnbull’s “should” demand for domestic gas reservation. The minister had another ‘energy intensity’ moment – a repeat of his own recently aborted call for some sanity in Australia’s energy market

Ages ago I was part of discussions inside government about the need to separate electricity generation from transmission, and have a market based approach to price signals.
The reasons at the time were clear – domination of energy markets by the engineers who ran the large generators, inept mechanisms for substitution between energy sources, exclusion of consumers from decision making.

There were little if any incentives for use of the “best” energy at lowest cost (where best could be defined in terms of reliability, capacity to meet sudden surges in demand, ability to be used in remote locations, or any of many different characteristics).

Pricing was important – if we gave consumers better price signals they might for example see the merits of energy efficient design rather than electric air-conditioning, which ought to cost a lot because it comes at peak times (Australia used to have peaks in winter for heating, now they come in summer for cooling, but that’s a story for another time).

What I think none of the policy advisers, myself included, anticipated was how subsequent energy market reforms – which by the time they were implemented were no longer within my patch of responsibilities – would evolve. Today, price signals aren’t clear, they are complex and confusing. Energy arbitrageurs make large profits out of finding opportunities in the complexity, so have a vested interested in keeping the system as complicated as possible. It’s practically impossible for consumer voices to be heard.

The system has greatly profited lawyers. Energy companies put vast legal resources into contesting AER decisions because gaming the regulatory system generates a bigger profit margin than actually providing energy.

What it illustrates is the divergence between the theory of markets and the practice of mixed markets where regulatory capture is an ever present threat. The current regulators are doing as best they can with the legislation they have been given, it’s not their failing. The root cause is the way in which legislation and regulation has been heavily influenced by corporate lobbying. If governments (successive governments of either stripe) had legislated for a more open, transparent market system we would be in a much better state. But perhaps that would have been impossible given the number of vested interests with deep pockets who were able to gain access to government Ministers.

There is a good recent report from a Global Access Partners taskforce (disclosure – I was a member) on national electricity reform.

Does the proposal to re-nationalise include nationalising AGL, which is probably the most important player in the Australian energy market, and which has been privately owned since it founding in 1837?

The problem with the natural gas market IS that it is a global market. Chevron, BP, Shell and others all sell natural gas globally. There is no Australian Natural Gas, it is only natural gas shipped from Australia. For this reason alone, the wholesale gas price in Australia should be the global price (that is the wholesale global price). If any company charges more for gas in Australia, they should pay either, a super profits tax, or, be charged with price gouging. If you want true globalization of energy markets, then you must enforce world price parities.

But Greg, because of the considerable capital costs in establishing an international trade in gas, and the delays in transporting it by tanker, such trade will always be dominated by volumes sold at long-term contract prices, which means that the spot and short-term contract markets for the gas – wherever it is sold – will always be volatile. and (worse) vary from region to region. It is a market where the law of one price will simply never hold – there is no generic “global wholesale price”.

It’s that volatility of the international spot market, and the difficulty it creates for STABLE supply to the domestic market, that creates the case for reserving a portion of output domestically. Yet critics of that policy are right when they say it reduces the long term return on investments in Australian gas and hence will reduce such investment – something that would hold true whether the investment is done by teh evil multinationals or by a government owned utility. Which is to say there aint no such thing as a free lunch.

If you go back 10 years you will see that I amongst others predicted this very outcome and advised against electricity infrastructure asset sales for the very reason of national interest in the face of Climate Change. There were a number of semi market based solutions proposed. The worst of all options was adopted to satisfy short term interests, ideological consolidations, and worst of all economic experimentation by economists.

Fortunately the market has presented a likely outcome that will provide maximum benefit to end users for both cost and energy security, though it is the worst outcome for the incumbent market operators and there is a measure of rough justice in that. The most vulnerable in the future will be those working and living in high rise structures. Dubai will be the poster child of worst architectural structures built for a future on a Global Warming planet.

So what is the probable outcome. This will be an individual property solar energy system regulated with electrical and thermal energy storage, and backed up by an integrated methane gas powered non solar period generator appropriately size for each property type. The gas to power this will come from our waste material gassified to a methane form and fed into natural gas grid system from a number of key municipal waste facilities.

This will not make much sense until you do a little research and apply a calculator to the figures. The key elements are:

The solar panels provide the bulk of the energy from appropriately sized Photo Voltaic/Thermal panels with the electrical energy going into batteries and the thermal energy heating water cylinders. This amounts to around 26 Kwhrs of energy storage per day for an average household system. During non solar periods the 30% efficient 3Kw backup generator runs to charge the storage battery with the waste heat 60% heating the water cylinder thereby making the system at least 80% efficient a clear 20% more efficient than the best gas powered grid energy system available.

The other calculation is to look at the energy content of our wasteful society. There is at least twice as much energy available from cellulosic waste (paper packaging cardboard) than most households require for their non solar period energy needs. So with 6 million households optionally independent from the grid but still connected there will be an 18 gigawatt reserve electrical energy generation capacity available from the combined generation capacity of the backup systems to cope with disasters across our Australian Community.

This is the most probable outcome given the history, technology directions, and political incompetence.

I have come to enjoy the now regular visits from competing energy providers desperate to see my business electricity bills. My standard line is “please, please, double my electricity cost tomorrow. Please really p*ss me off so I can see how long it takes me to put a system together to make my business and my home independent of this energy industry greed”.

As I said earlier the primary losers are the incumbent energy infrastructure operators whos throughput will steadily decline, the owners and occupiers of existing highly inefficient high rise properties and heavy industry where property area is insufficient to provide solar energy for their consumption scale. The cost of maintaining the broad grid will fall upon an ever decreasing consumer group. The impact of electrical transportation on supporting the grid industry is too uncertain in the current time frame as for Australia there is zero interest in promoting it despite massive advances in all sectors (road, air, and marine). I suspect that the rise in electricity demand for transportation energy will not be sufficient to prevent an grid infrastructure demand slump with a consequential electricity price cost rise that will serve to drive the transition to distributed energy production.

There was a much better way that would have maintained Australia’s mid noughties low energy cost advantage, but ignorance and greed prevailed.

so where are the studies letting us know what it is the private and/or corporate market does best and what it is public ownership does best?

mind you,any studies would have to avoid the trap Intergrain fell into in Western Australia. when monsanto bought into public funded research and got access to generations of public funded data and the say on what was being studied.
they’ve since sold back out.